The extent to which risk is reduced through portfolio diversification primarily depends on the covariance between individual assets in the portfolio.

Question

Quizplus · Accepted Answer

Covariance measures the degree to which two assets move in the same direction (positive covariance) or opposite directions (negative covariance). By including assets with low or negative covariance in a portfolio, the overall risk of the portfolio can be reduced through diversification. Therefore, the extent to which risk is reduced through portfolio diversification primarily depends on the covariance between individual assets in the portfolio.

The Extent to Which Risk Is Reduced Through Portfolio Diversification